Loan Modification

FHA short refi program: Obama administration vows to veto legislation cutting mortgage relief programs

By Karen Lawson

The  FHA short refinance program hasn’t been wildly successful with mortgage lenders due to the requirement for mortgage holders to write off a minimum of 10 percent of the unpaid principal balance for each loan retired through the short refinance program.  We’ve previously observed that the complexity of the secondary mortgage market would likely quash the short refinance program, but House legislators backing legislation to kill the program note doing so would save tax payers money. Let’s think about how cutting government-sponsored mortgage relief programs such as the Home Affordable Modification Program (HAMP) and the short refinance program would impact taxpayers.

Protecting taxpayers, or not:  Do you have foreclosures in your neighborhood?

The problem with the short refinance program is that those owning the mortgage loans aren’t willing to write down mortgage balances by a minimum of 10 percent as required by FHA guidelines. Much of the reason for this rests with the nature of how mortgage loans are sold on the secondary mortgage market; groups of home loans are frequently grouped together and these groups of loans “securitized” and sold to organizational investors including mutual funds, and pension funds. Changing the mortgage balances and interest rates for such mortgage loans is difficult as it changes the value of home loans used to back the investment “securities.” This is a simplified version of a complicated situation, but the Obama Administration has taken a simple stance toward protecting federal homeowner assistance programs. They’ve vowed to veto any legislation killing these programs. That’s good news, but how can mortgage holders and loan servicing companies be persuaded to see that preventing foreclosure is financially and ethically preferable to allowing families and communities to be ruined by the specter of homelessness, lost tax revenue, and the blight of vacant and abandoned homes?

Mortgage loans: Foreclosure costs money and depletes community resources

What happens to Joe and Jane taxpayer when their neighbors lose their home to foreclosure? Joe and Jane would likely be surprised to know that their neighbors were denied a loan modification through HAMP. Or worse, they contacted their mortgage company and could not get through, or never received responses to her requests for help. Joe and Jane’s neighbors finally abandon ther home when they find work in another state. 

Foreclosure impacts entire communities; local governments receive less tax revenue when home values fall, and public safety resources are tapped when vacant foreclosed homes attract crime or become unsafe. Meanwhile, homeowners with formerly good credit find that financial options and career opportunities are limited by their newly poor credit and public record of a mortgage foreclosure.

There must be a more fiscally sound method of addressing the problem of owing more on a mortgage than homes are worth than foreclosing such mortgages.  Not everyone who’s “underwater” on their mortgage and cannot sell or refinance is a “deadbeat.”  It’s time to find workable solutions to problems caused by devalued homes and homeowners experiencing long-term unemployment.

Full post as published by FHA Mortgage Guide on March 14, 2011 (boomark / email).